Yahoo Finance D-DAY for the Banks: What will it mean for Aussies
The government will release the final report of the banking Royal Commission at 4:10pm today, after receiving it from Commissioner Kenneth Hayne last Friday.
It’s a document 14 months in the making, after then-Prime Minister Malcolm Turnbull announced the government would establish an investigation into wrongdoing in the banking, superannuation and financial services industry.
Revelations of fees charged for no service, fees charged to dead people, insurance sold to people with intellectual disabilities and couples’ retirements ruined, have since rocked the financial sector.
The interim report, released in September, lambasted corporate greed and the “pursuit of short-term profit at the expense of basic standards of honesty”.
It also criticised an emphasis on sales, rather than service, and poorly developed bonus schemes which rewarded profit, rather than purpose.
In the interim report Hayne warned that more regulation was not the answer. Instead the current laws should possibly be simplified to reflect the “basic standards” expected by the Australian public.
What’s going to happen next?
Industry experts have some thoughts about what will be in today’s report, and critically – what it will mean for Australians.
Financial services will have to be more transparent
“It seems certain the Royal Commission will recommend that financial institutions have to be more transparent about fees and charges, and more proactive about assessing suitability of products before signing people up for them. Both would be big wins for consumers,” finder.com.au’s editor-in-chief Angus Kidman told Yahoo Finance.
But housing credit will likely be harder to come by
Banks will tighten up their lending standards as government and regulator scrutiny take effect. This means consumers may find it harder to obtain a loan, Kidman warned.
Echoing Kidman, Canstar group executive of financial services Steve Mickenbecker said that while Australian consumers will ultimately benefit from the reinforcement of customer-first principles, he warned an overreaction could be harmful.
“An over-tightening of credit could turn out to be a “careful what you wish for” moment, with potential for overly tough credit, smashed property prices and low growth.”
Recognising this, the Property Council of Australia called on the government to fix the problems within the financial services “without damaging the rest of the economy”.
Will we see less Aussie investment?
A byproduct of tightening lending standards could also be softened investor activity. The December 2018 quarter capped a “poor” year for newly-listed companies on the ASX, HLB Mann Judd Partner Marcus Ohm said last week.
It was a divergence from a seven-year trend which saw the number of initial-public offerings (IPOs) every year.
And the Royal Commission could worsen this situation, warned fellow partner Jude Lau.
“I’m not sure if people have actually considered that, the whole impact on the flow of funds to businesses at the moment,” Lau said.
“I had lunch with a minister and I said, ‘Has anyone actually given any thought to the unintended costs or flow-on impact that’s going to flow on from the Royal Commission?’”
Continuing, Lau said banks aren’t lending, leading to uncertainty around how people obtain finance and limiting the ability to plan.
You’ll be hearing more from your financial adviser
No more rubber stamping.
“The biggest changes are likely to be for financial advisers, who will have to contact their clients regularly and ensure that they offer real value,” he added.
Is it the end of the mortgage broker?
That’s unlikely, but trail commissions – or the ongoing commissions brokers receive from lenders after directing a borrower in their direction – could be on the chopping block.
However, according to a new report from market research provider, Momentum Intelligence, brokers will continue to have a place in the Australian property landscape.
It found 96 per cent of people who used a broker were satisfied or very satisfied and 58 per cent don’t want to pay a ‘fee-for-service’.
“A serious implication of the proposed fee-for-service model is that consumers would be naturally driven to their primary personal bank, which is likely to be one of the big four. This would reduce competition by driving smaller lenders, who rely heavily on brokers, out of the market,” director of Momentum Intelligence Alex Whitlock said.
“Fewer lenders will give the dominant retail banks the opportunity to increase their margin by pushing up interest rates. With mortgage repayments and household debt concerns looming, this result could also potentially lead to higher financial distress for Australian consumers.”
A change in regulation
While Hayne has historically argued the solution isn’t in more compliance requirements, it’s likely regulation and consumer protection will be a major topic of discussion.
“It will be important that any increased regulation that occurs as a result is not out of step with the regulatory developments in the rest of the world,” the CEO of APIR Systems, Chris Donohoe told Yahoo Finance.
“Any regulatory changes that are implemented as a result of the royal commission should be seen as an opportunity to harmonise with other similar jurisdictions where possible.
“Far from creating a burdensome compliance and regulatory framework, harmonised global regulations and standards have many advantages, and help achieve better outcomes for investors.”
He said global standards promote transparency and help investors navigate the system and make informed decisions.
A tricky political landscape
As the director of the Ethics Centre, Simon Longstaff recently noted, enforcing the Royal Commission’s recommendations will be a difficult tightrope for whichever party wins the next election.
They will need to balance the recommendations, a slowing property market and a disenchanted consumer base.
“It’s worth remembering that recommendations don’t automatically equate to changes, though it would be a brave government that ignored this set entirely,” added Finder’s Angus Kidman.
“But with an election due before May and very little sitting time for Federal Parliament, it’s highly unlikely any changes will be seen this financial year.”
Economist Dr Hewson from the Crawford School of Public Policy agreed.
“I suspect government will be under pressure to accept most of the recommendations, so focus will shift to how they will translate into actions – after the election, of course,” he said.
Stay tuned: Yahoo Finance is providing rolling coverage of the Royal Commission.
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